Local Governments’ Responses to Revenue Changes: The Effects of Unreserved General Fund Balances

ABSTRACT

Volatile revenues affect the quality and consistency of municipal service provision. This article investigates how cities use unreserved general fund balances to mitigate annual expenditure fluctuations when confronted with volatile revenues. Based on the analysis of a panel dataset of over two thousand American cities from 2003 to 2011, the fixed-effects regression results suggest that unreserved general fund balances reduce municipal expenditure fluctuations on a year-to-year basis. The expenditure-smoothing effects were more pronounced when municipal governments experienced large revenue changes. Results are robust when excluding large cities, using different cutting-points to define ‘moderate’ or ‘large’ revenue changes, and in recession and non-recession years. This article contributes to the local expenditure stabilization literature by recognizing the unreserved general fund balances’ expenditure-smoothing effects during ‘non-rainy days.’ It adds empirical evidence to the organizational theory that financial slack works as a crucial buffer against external changes and provides managerial discretion to local administrators.     

How does intergovernmental fiscal environment affect general fund balances of major American cities?

This study explores the extent to which intergovernmental fiscal factors affect fiscal reserves in municipal general funds. Statistical results from panel data of 87 major cities in the US for the period from 1995 to 2010 show that cities facing more restrictive limitations on local property taxation tend to maintain higher levels of unreserved general fund balances. Additional analyses also show that fiscally constrained cities accumulate surpluses in their general funds. This is consistent with the proactive approach in which municipal governments make fiscal decisions with the awareness of expected state constraints on their revenue-raising capacity. We call for consideration of relevant intergovernmental constraints in the determination of appropriate level of fund balances for municipal governments.     

Identifying and Coping with Fiscal Emergencies in Ohio Local Governments

Abstract

This study examines the reasons fiscal emergencies occur in Ohio local governments and the strategies that local governments use to recover. In Ohio, fiscal emergencies have regularly occurred predominantly at the local level. This study aims to reveal the internal process that both bring on and ameliorates fiscal emergencies. Previous studies failed to differentiate between fiscal stress and fiscal emergencies and did not include the role of the Ohio Fiscal Emergency Law in assisting local governments in restoring long term fiscal health. This study finds fiscal emergencies in Ohio were caused by: (1) the increased costs associated with unfunded state-mandated programs and, (2) major economical downturns brought on by local plant closings. Local governments were found to have responded in the short run by strategies such as targeted expenditure cuts and in the long run by increased the use of economic development.     

Hardening Budget Constraints: A Cross-National Study of Fiscal Sustainability and Subnational Debt

This study explores the financial sustainability of subnational governments in four different countries. Scholars argue that subnational fiscal capacity helps local governments deliver better public services and provide public goods, which in turn helps to promote economic growth. While administrative control by the central governments contributes to reducing moral hazard from the soft budget constraints, bottom-up strategies to manage fiscal profligacy also need attention. The study first provides understanding about the characteristics of central-local governance and management of subnational government debt of each country. Then, we test our hypotheses regarding local fiscal capacity and administrative control, including political-economic factors that may affect debt spending by local governments. Our findings show that subnational fiscal sustainability improves when the central governments have clear rules to intergovernmental transfers in place and more (market) liberal policies, meanwhile when subnational governments have a more fiscal capacity and less intergovernmental transfers they are able to manage their debt more soundly.     

Can alternative service delivery save cities after the Great Recession? Barriers to privatisation and cooperation

ABSTRACT

Cities continue to face fiscal challenges after the Great Recession and alternative service delivery is being emphasised as a solution. How promising is alternative service delivery as a solution and what are its barriers? Regression analyses using 2012 survey data of US local governments show that local governments manage procedural barriers, but structural barriers of economy and demography hinder privatisation and cooperation. Places with a housing bust (measured as decline in home values) can use privatisation, but not places with more or increased poverty. Cooperation is more promising for places with increased poverty, but lack of a willing partner hinders this spatially constrained tool. Neither cooperation nor privatisation is promising for places with low home values. State governments must level the playing field for localities with weak economies if market approaches to service delivery are the main tools for local governments to survive fiscal stress.     

The Effect of Fiscal Decentralization on the Financial Condition of Municipal Government

This study examines the effect of fiscal decentralization between states and their local governments on the financial condition of municipal governments. There are strong theoretical arguments on both sides of the federalism debate about the benefits for and against decentralization. Most of the research in this area investigates economic and social welfare consequences of fiscal decentralization. There is limited research, however, on the effects of fiscal decentralization on the financial health of local governments. Using data from the nation’s 150 largest cities, this study finds that intrastate fiscal decentralization results in weaker financial condition for municipalities in those states.     

Governmental financial resilience under austerity in Austria,England and Italy: How do local governments cope with financial shocks?

The recent economic and fiscal crisis provides an opportunity for learning lessons of general and practical relevance about how governments face shocks affecting their financial conditions. This article draws on the resilience concept to investigate the organizational capacities that are deployed and/or built by local governments (LGs) to respond to such shocks, looking at their combinations and interactions with environmental conditions. The article presents the results of a multiple‐case analysis of 12 European LGs across Austria, Italy and England. The analysis allows us to highlight and operationalize different patterns of financial resilience, that is, self‐regulation, constrained or reactive adaptation, contented or powerless fatalism, that are the result of the interaction and development over time of different internal and external dimensions.     

The determinants of fiscal transparency in Chinese city-level governments

ABSTRACT

The transparency of the fiscal performance of governments has attracted attention from researchers, policy-makers and practitioners around the world. This study examines the determinants of fiscal transparency in the city-level governments of China, which has become a key issue in the drive to modernise the Chinese state. Employing cross-sectional data from the 2017 Statistical Yearbooks published by the official statistical institutions and the 2017 Fiscal transparency report of city-level governments edited by the Tsinghua University, this study finds that economic development, economic openness, and dependence on transfer payments are associated with weaker fiscal transparency. Large cities, those with high levels of internet usage and cities higher up within the Chinese administrative hierarchy are associated with stronger fiscal transparency. The theoretical and practical implications of these findings are discussed.     

Local Fiscal Stress in Sub‐Saharan Africa: The Kenyan Example

Abstract

This article identifies the fiscal weaknesses of local government in Africa, with concentration of the fiscal stress that is endemic to their condition. It then examines Kenya, as a case study in sub‐Saharan Africa. It continues to focus down on three Kenyan cities—Nairobi, Mombasa, and Kisumu, and identifies their six major revenue sources: land based revenues, regulatory revenues, income‐based taxes, service revenues, user charges, and government grants. Although some of the data is problematic, it is possible to determine several reasons for local fiscal stress. These reasons include limited access to stable financial resources, unstable national economic performance, centralized governmental control, mixed results of decentralization, and institutional and managerial weaknesses, including corruption in the collection and use of resources. Four recommendations are advanced to help these local governments: the development of local credit systems, the use of non‐governmental organizations, the clarification of the use of foreign aid, and the development of a greater capacity for governance. This articles main theoretical contribution is the development of an analytic framework for examining the reasons for fiscal stress in sub‐Saharan Africa. By examining revenue and expenditure patterns of the three localities, the article develops a data set that highlights some of the reasons for local government financial problems—the governments do not know how much revenue can be collected from a particular revenue source, they do not have records of existing sources of revenue, and they only collect about 40–60% of their estimated collections.     

Measuring horizontal fiscal imbalance: the case of Italian municipalities

In the literature on fiscal federalism, vertical fiscal imbalance has been widely studied, while the theme of horizontal fiscal imbalance and inequality among local governments, due to differences in their fiscal capacities, has been less explored. This article contributes to fill the gap. A new method to compute fiscal capacities based on regression analysis is proposed, which can overcome some of the drawbacks of traditional methods such as the representative tax system. This new approach is then employed to evaluate the fiscal capacities of Italian municipalities over the period 2002–2010. Finally two global measures of the horizontal fiscal imbalance are used to evaluate the equity implication of a major policy change occurred in 2008 in Italian municipal finance.     

Local revenue structure under economic hardship: reliance on alternative revenue sources in California counties

This article investigates how a worsening economy affects local revenue structure, and whether the impact is moderated by the fiscal relationship within higher levels of government. The revenue potential of nontax sources – fees/charges and fines/forfeitures – is considerable for local governments under economic hardship. With the panel data from California counties over a period of 11 years (2000–2010), this article shows that reliance on nontax revenue largely depends on the economic and fiscal factors that vary across counties, and the effect of economy is contingent on local dependence on intergovernmental transfers. Counties are likely to raise nontax revenue when the economy worsens and their transfer-dependence increases, while the marginal effect of the economic indicators changes from negative to positive as transfer dependence increases. This article illuminates the characteristics of the two types of nontax sources in terms of the mechanisms of incentivising human behaviour and concludes with policy implications for researchers and practitioners.     

Political Fragmentation and Fiscal Status: Evidence from Municipalities in Israel

Abstract

This article analyses the link between fiscal balance and political fragmentation. While a large body of literature states that political fragmentation leads to fiscal deficits, others suggest that political fragmentation is associated with political competition, which tends to improve fiscal balance. These hypotheses are tested using budgetary and political data of municipalities in Israel for the years 1998–2006. The results suggest that both hypotheses may be correct, depending on voting behaviour. In Arab municipalities, where residents vote according to clan affiliation, low levels of political fragmentation are associated with large debts. On the contrary, in Jewish municipalities, low levels of political fragmentation are associated with small debts, since in these cases, coalition formation requires less spending and is easier to sustain.     

Fiscal Capacity Equalisation in Tanzania

Fiscal equalisation aims at enabling decentralised governments to supply similar services at similar tax rates. In order to equalise fiscal disparities, differences in both fiscal capacities and in fiscal needs have to be measured. This paper focuses on the measurement of fiscal capacity in a developing country. The current intergovernmental transfer system in Tanzania does not take differences in fiscal capacity into account. As a result, local governments in rich areas are able to generate considerably more revenue per capita than those in poor areas. Public services in poor areas are hard to finance. We propose a way of measuring fiscal capacities of local governments in Tanzania using poverty data. We use this measure to derive an equalisation grant that would support local governments that have a low fiscal capacity.     

Local government’s disaster management capacity and disaster resilience

ABSTRACT

The questions in this research are as follows: How does the disaster management capacity of local governments affect the disaster resilience of local communities? The research distinguished local communities by type according to their level of exposure to natural disaster hazards and the analysis compared the impact of the disaster management capabilities on disaster resilience by the type of natural disaster exposure. The analysis results are as follows: While the frequency of disasters local communities experience is low, the magnitude of disasters experienced is large; external network and manual had a positive effect on disaster resilience. When disaster frequency experienced by local communities is high, the magnitude of disasters experienced is small, and internal network and public relation contribute to increased disaster resilience. In conclusion, this research will help expand the externalities of disaster management discussed in the fields of public administration and policy.     

Querying the resilient local authority: the question of ‘resilience for whom?’

ABSTRACT

Analysis of how English local authorities (LAs) have fared post large cuts to their funding by the Coalition and now Conservative governments indicates a considerably resilient organisation. Engaging with recent critical strands in the resilience literature this paper, however, queries that resilient LA account. Better consideration of resilience’s repercussions across the landscape of local services provision is needed. The question of ‘resilience for whom?’, drawn from the conceptual literature, is introduced and frames an exploration of the experiences of LA resilience strategies among small charities in deprived areas of London. Deleterious dimensions of resilience are seen in its distancing and de-coupling effects and associated voluntary provider fading. There are losers and a dark underside to explore. Such perspectives add to the local government and austerity scholarship insight as to the noted ‘austerity puzzle’ and a questioning of its tendency towards a ‘great survivor’ account.     

Fiscal Stress Management During the Financial and Economic Crisis: The Case of the Baltic Countries

The Baltic countries—Estonia, Latvia, and Lithuania—were severely hit by the global financial and economic crisis in 2008–2011. In response to the crisis, all three states chose to undertake extensive fiscal consolidations. This article examines the strategies adopted by the Baltic governments for managing fiscal stress and consolidating their budgets in the light of the existing literature on cutback budgeting. In all three countries, the governments combined expenditure and revenue measures, with a larger share of adjustment taking place on the expenditure side. Among expenditure measures, a mix of across-the-board and targeted cuts was adopted, though the importance of targeted cuts increased over time. The case studies also indicate that although the theoretical propositions of the cutback budgeting literature point to the correct directions overall, further refinement is needed in several theoretical issues.     

‘Faulty’ fiscal illusion: examining the relationship between revenue diversification and tax burden in major US cities across the economic cycle

We investigate how revenue diversification affects tax burden in major U.S cities as it interacts with fiscal balance reported in the general fund over the economic cycle. We find that more diversified cities have higher tax burdens, and that this effect is strengthened when cities maintain a large surplus in the general fund. We also test models of revenue diversification's impact on tax burden using data from 1995 to 2010, separated into good fiscal years (1995-2001, 2004-2007, 2010) and bad fiscal years (2002-2003, 2008-2009). Model estimates show that greater revenue diversification leads to higher tax burden in bad fiscal years but this outcome is not found in good fiscal years. Cities seek greater revenue diversification when they are experiencing economic recessions. This study contains important implications for local financial management and contributes to the literature on revenue diversification and tax burden.     

Intergovernmental Fiscal Transfers and Fiscal Capacity

An intergovernmental fiscal transfer is an instrument used by governments to equalize fiscal capacity. However, with the large discrepancies in fiscal capacity among Local Authorities (LAs) in Kenya, it is evident that the intention of the instrument has not been met. These disparities lead to inequity as some LAs receive better services for their tax, while others do not.

Using panel data from 2001-2006 among 22 LAs, the Local Authority Transfer Fund (LATF) was found to be high in LAs that had substantial fiscal capacities. This suggests the need to revise the formula used in computing LATF.     

Political Consensus and Fiscal Outcomes

It is becoming difficult to maintain consensus in a period of economic austerity, and this possibly challenges the ability of democratic institutions to take decisions on tough economic questions. In order to find out how political consensus influences fiscal outcomes, this article sets out to analyse the association between political consensus and public expenditure growth. The results show that political consensus is positively associated with both budgeted and actual expenditure growth, but also negatively associated with budget overruns. This indicates that political consensus comes at a cost, while at the same time politicians may be better at sticking to budgets if political consensus exists. The analysis is based on a pooled regression analysis of the local governments in Denmark in the years 2008 and 2009 using a data set combining survey data with administrative data on the local governments.     

Restoring Fiscal Balances Post the Global Economic Crisis in Botswana

This article discusses the restoration of fiscal balances in Botswana after prolonged deficit financing. Botswana is a diamond-export-dependent country; resultantly, it suffered revenue losses due to depressed demand for diamonds during the global economic crisis. Reduced revenues necessitated deficit financing between 2008/09 and 2011/12. Debt was financed through dissaving and borrowing. However, the government restored budget balances in April 2012. While this case study is Botswana-specific, there are general lessons. These are: using a crisis to introduce public finance reforms; eschewing populism aimed at short-term gains; and the need for politicians to take very bold decisions to guide fiscal policy.